9911796707
TMI Blog2003 (2) TMI 395X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Limited (hereinafter referred to as the NSE). The respondent No. 5 is also a company registered under the Companies Act and it has opened an account with the petitioner-company (share broker) and purchased certain shares. 3. The case of the petitioner-company is that in the year 1996 under instructions from respondent No. 3 the petitioner-company opened an account being No. K-005 in the name of respondent No. 3 Thereafter in 1997 respondent No. 3 introduced his son, the respondent No. 4 and on their joint requests, the petitioner-company opened another account being No. S-025 in the name of respondent No. 4 with respondent No. 3. It is alleged that the petitioner-company on 17th April, 1999 in terms of the instruction given by respondent Nos. 3 and 4 purchased 4000 equity shares of GMDC Limited with its own fund and that purchase was duly entered in the account No. S-025 of the respondent Nos. 3 and 4 but the price including commission of the petitioner-company remained due. It is alleged that the respondent Nos. 3 and 4 subsequently introduced respondent No. 5 to the petitioner-company as their sister concern and on the request of respondent Nos. 3 and 4 the petitioner-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n agreement between petitioner-company and respondent No. 5, the said direction on the petitioner-company to submit to the arbitration proceeding is wholly without jurisdiction. Therefore the main contention of the petitioner-company in the writ petition was that there was no arbitration agreement between the petitioner-company and respondent No. 5, therefore, the NSE cannot insist on the petitioner-company's submitting to the jurisdiction of arbitrator. Learned counsel for the petitioner-company submitted before the learned single Judge that respondent No. 5 is only a customer and it is not bound by the Regulations or Bye-laws of NSE. It was submitted that there is no arbitration agreement between the petitioner-company and respondent No. 5; and that the petitioner-company is a broker and is governed by the NSE Regulations or Bye-laws, but there is no arbitration agreement with the customers like respondent No. 5, therefore, the petitioner-company cannot be forced to unilaterally submit to the jurisdiction of the arbitrator in a dispute between the petitioner-company and its customer. In this connection learned counsel for the petitioner-company relied on Regulation 4.3.1 of the N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prohibiting options and by providing for certain other matters connected there with." 7. Therefore, the purpose of the enactment of this Act is that any dispute arising out of the securities has to be regulated by the Act of 1956. 8. 'Contract' has been defined in section 2(a) of the Act of 1956, which reads as under : "2(a) 'contract' means a contract for or relating to the purchase or sale of securities;" 'Member' has been defined in section 2(c) as under : "2(c) 'member' means a member of a recognised stock exchange." 9. 'Option in securities' has been defined in section 2(d) as under : "2(d) 'option in securities' means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities." 10. 'Recognised stock exchange' have been defined in section 2(f) as under: "2(f) 'recognised stock exchange' means a stock exchange which is for the time being recognised by the Central Government under section 4;" 'Securities' have been defined in section 2(h ) as under : "2(h) 'securities' include- ( i)shares, scrips, stocks, bonds, debe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... classes of contracts in respect of which settlement shall be made or differences paid through the clearing house; (g)the regulation, or prohibition of budlas or carry-over facilities; (h)the fixing, altering or postponing of days for settlements; (i)the determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities; (j)the terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing; (k)the regulation of the entering into, making, performance, recession and termination of contracts, including contracts between members or between a member and his constituent or between a member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or interme- diary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members who are not parties to such contracts; (l)the regulation of taravani business including the placing of limitations thereon; (m)the listing of securities on the stock exchange, the inclusion of any security for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispense with the condition of previous publication." 12. Section 10 empowers the Securities and Exchange Board of India (SEBI) to make and amend Bye-laws of any recognised stock exchange. Section 11 empowers the Central Government to supersede the governing body of the recognised stock exchange. Section 12 deals with the power of the Central Government to suspend business of recognised stock exchanges. Section 13 empowers the Central Government to declare certain contracts in some areas illegal or same may be declared void under section 14 and the power of appeal and penalties have been prescribed. The other provisions of the Act of 1956, as far as we are concerned, have no relevance. 13. In exercise of such power the National Stock Exchange has framed National Stock Exchange (Capital Market) Regulation, 1994 (hereinafter referred to as Regulation) and Bye-laws (hereinafter referred to as Bye-laws) which regulate the relation between the broker and its constituent, that is, client. The Regulations which have bearing on the issues involved in the matter are set out hereinafter. 14. Regulation 1.3.3 defines 'Authorised Person', which reads as under : "1.3.3. Authorised Person : A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurity deposits and other monies as may be specified by the Board or the relevant authority from time to time, on admission as trading member and for continued admission. The fees, security deposits, other monies and any additional deposits paid, whether in the form of cash, bank guarantee, securities or otherwise, with the Exchange, by a trading member from time to time, shall be subject to a first and paramount lien for any sum due to the Exchange and all other claims against the trading member for due fulfilment of engagements, obligations and liabilities of trading members arising out of or incidental to any dealings made subject to the Bye-laws, Rules and Regulations of the Exchange. The Exchange shall be entitled to adjust or appropriate such fees, deposits and other monies for such dues and claims, to the exclusion of other claims against the trading member, without any reference to the trading member. (d)Trading member of any trading segment may trade on the Exchange in the NSE securities applicable to that segment. (e)Trading members may trade in relevant securities either on their own account as principals or on behalf of their clients unless otherwise specified by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 'Annexure 3'. The term 'constituent' herein shall not include a Participant. The Exchange may categorise constituents into such types as may be necessary for the above purpose and specify the clauses to be included in agreement to be entered into by the Trading Member depending on the category of such constituent. However, the Trading Member's responsibility shall not in any way be reduced due to non-execution of agreement with the constituent." 18. Regulation 4.3.1 makes a reference of 'Annexure 3' which is a format of an agreement which has to be entered into by the trading member with its constituent or customer. Even if this agreement is not executed then also the responsibility of the trading member shall not in any way be reduced due to non-execution of agreement with the constituent. There-fore, in terms of the aforesaid Regulation responsibility has been placed on the shoulder of the trading member, that is, the stock broker and it is his responsibility to enter into an agreement as per Annexure-3 which contains stipulation that this agreement shall be subject to the Government Notifications, Rules, Regulations, Guidelines issued by SEBI and Stock Exchange Rules, Regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules and Regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating their validity, construction, interpretation, fulfilment or the rights, obligations and liabilities of the parties thereto and including any question of whether such dealings, transactions and contracts have been entered into or not shall be submitted to arbitration in accordance with the provisions of these Bye-laws and Regulations." 22. Clause 2 of Chapter XI of the Bye-laws further lays down that all transactions, dealings and contracts shall be deemed to be subject to these Bye-laws, Rules and Regulations. Bye-law 2 of Chapter XI reads as under: "(2) Provisions of these Bye-laws and Regulations deemed to form part of all dealings, contracts and transactions : In all dealings, contracts and transactions which are made or deemed to be made subject to the Bye-Laws, Rules and Regulations of the Exchange, the provisions relating to arbitration as provided in these Bye-laws and Regulations shall form and shall be deemed to form part of the dealings, contracts and transactions and the parties shall be deemed to have entered into an arbitration agreement in writin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of securities and, therefore, the Government came out with pieces of legislation so as to regulate the trading in securities. Bare reading of this Act, Bye-laws, Rules and Regulations make it more incumbent on the trading member to adhere to all these Acts, Bye-laws, Rules and Regulations. The scheme of relevant provisions of the Act Bye-laws, Rules and Regulations have been reproduced above in order to show that repeatedly in all such Bye-laws, Rules and Regulations emphasis has been given on the responsibility of the trading member so that the consumers, that is, the customer may not be cheated. In all the Bye-laws, Rules and Regulations burden has been placed on the trading member that they may not cheat bona fide customers who is interested in dealing in securities. Regulation 4.3.1has been couched in very positive terms and it leaves no manner of doubt that it is the trading member who is responsible for all these dealings. If he fails to execute the agreement with his customer, as given in 'Annexure 3' which contains a stipulation in Clause 6, the agreement shall be deemed to have been executed. Statute has made such deeming provision. Therefore, an inference of a statutory d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitration. The argument of the learned counsel for the petitioner-company is without any basis as we have already discussed above that there is a deeming arbitration agreement as per the Regulation/Bye-laws and it is obligatory on the part of the trading member that it shall abide by the Bye-laws, Rules and Regulations of the NSE. Section 7(5) of the Act of 1996 does not help the petitioner-company, because there exists deeming arbitration agreement between the petitioner-company as trading member with its constituent, that is, respondent No. 5. Therefore, the submission of the learned counsel that by virtue of section 7(5) of the Act of 1996 in absence of arbitration agreement the petitioner-company cannot be forced to submit to arbitration does not appear to be justified. 30. It was also pointed out that the dispute has not been raised within a period of six months as prescribed in the Bye-laws. We don't need to go into that aspect of the matter, as we have already held that there exists a deemed arbitration agreement between the petitioner-company and respondent No. 5, therefore, this question can be raised by the petitioner-company before the Arbitrator. In this connection l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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